A Day Makes A Difference- “Durbin” The Day After

By Thomas P. Brown and Sarah Starcevich, O'Melveny & Myers LLP

Thursday marked the latest turn in the extended debate over what role, if any, the government should play in regulating the price that merchants pay for the privilege of receiving retail payments.  In the 1860s, this debate focused on state issued bank notes and the discounts that the recipients of a note issued by one bank paid by when they deposited that note in another bank.  In the 1910s, this debate focused on the discount fees that paid by recipients of checks issued by one bank when they deposited at another bank.  Today, this debate goes by the short-form “Durbin.”

“Durbin” refers both to Senator Richard Durbin, D-IL, as well as the language that he managed to append to the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Senator Durbin’s language, in its final form, directs the Federal Reserve to issue rules (i) limiting the revenue that large financial institutions can receive in connection with debit transactions and (ii) governing how debit transactions get routed from merchants to financial institutions and back again.  Although Senator Durbin managed to append his language to the Dodd-Frank Act without a single hearing, on Thursday, “Durbin” came up in hearings in both chambers of Congress.  And the tenor of the conversations should provide financial institutions with the first glimmer of hope that that they have had on the issue since Senator Durbin rose to speak in favor of his proposed amendment last Spring. 

On the Senate side, the Chairman of the Federal Reserve Board, Ben Bernanke, and the Chairman of the FDIC, both expressed reservations about the implications of the “Durbin” amendment.  Although Chairman Bernanke’s written testimony for the hearing merely noted that the FRB has issued draft rules and sought comment, Senators on the Bank, Housing and Urban Affairs committee asked the Chairman to address the substance of the proposed rules.  And in answer to those questions, Chairman Bernanke doubted whether one of the features of the statutory language would achieve its apparent goal of insulating small financial institutions from the effect of the statutory language.  Chairman Bair made similar observations.  And together, their comments sent a fairly clear signal that the banking agencies would likely to delay implementation of the rules that will implement “Durbin.”

Delay was also the word of the day in hearing before the House Subcommittee on Financial Institutions and Consumer Credit.  Where Chairman Bernanke and Chairman Bair spoke on implementation of the many facets of Dodd-Frank, the hearing before the House Subcommittee was specific to Durbin, bearing the title “Understanding the Federal Reserve’s Proposed Rule on Interchange Fees: Implications and Consequences of the Durbin Amendment.”  Two panels of witnesses testified in the House subcommittee hearing.  The first panel consisted of the Honorable Sarah Bloom Raskin, Governor of the Federal Reserve Board.  On the second panel sat a small business owner and representatives for the Credit Union National Association, the Consumer Bankers Association, the Merchant Payments Coalition, Visa, and the Retail Industry Leaders Association.

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Related Articles:

- Testimony by Chairman Bernanke on implementation of the Dodd-Frank Act

- Testimony by Governor Raskin on Interchange Fees

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Although witnesses on the second panel got their points across, the testimony of and questions to Governor Raskin were by far the most interesting.  Govenor Raskin’s testimony neither criticized nor supported the Durbin Amendment.  Rather, she devoted her testimony to an extended confession of ignorance.  She admitted that the Board knows very little about the impact of its rules. She conceded, for example, that she does not know what the impact on consumers will be from interchange fee caps.  In theory, she explained, in a competitive market, the savings to merchants from the cap should be passed onto consumers. But she acknowledged that reality could be very different from theory. 

Subcommittee members seized on Governor Raskin’s equivocation and, in their questions, seemed to advocate for a legislative pause.  Subcommittee members overwhelmingly expressed concern over this fast-approaching deadline and the propriety of the Board moving forward without more information and consideration.  The Subcommittee members expressed concern that the Board had not surveyed small banks to determine the impact the Durbin Amendment would have on them, despite the fact that the Board claims these small institutions fall within Durbin’s regulatory authority.  They also expressed concern that the Durbin Amendment would not benefit consumers and that more information was needed on the subject.  Subcommittee and panel members were also quick to raise and criticize the rushed fashion in which the Durbin Amendment was initially passed, the abbreviated consideration it was given at the time, and the short compliance period for Board rulemaking.  In response to these questions and observations, Governor Raskin repeatedly emphasized that the Board is simply following Congressional orders and invited the members to change the instructions if they are unhappy with the likely outcome.

For supporters of the financial services industry, yesterday was a good day.  For the first time since Republicans lost the majorities in both chambers of Congress, members of the House and Senate seemed genuinely concerned about the implications of government intervention in this industry.  But a single day—even a day marked by hearings in both chambers of our bi-cameral legislative branch—does not a law make.  As anyone who watched Saturday morning cartoons in the 1970s and 1980s remembers, language becomes law only after affirmative votes in the House and Senate plus a Presidential signature (or votes to override a Presidential veto).  And although today’s hearing suggest that the consumer financial services industry once again has friends in Congress, it is not clear whether they have a friend in Congress willing to fight as hard for them as Senator Durbin is willing to fight for the retail industry.

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